Working Paper: CEPR ID: DP13807
Authors: Manolis Galenianos; Alessandro Gavazza
Abstract: We build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates and higher compliance costs for lenders. We focus on the credit card market, in which we observe U.S. consumers borrowing at high and very dispersed interest rates, despite receiving many credit card offers. Our framework includes two main features that account for these patterns: endogenous effort of examining offers and product differentiation. Our calibration suggests that most borrowers examine few of the offers that they receive, thereby foregoing cards with low interest rates and high non-price benefits. The calibrated model implies that interest rate caps reduce credit supply modestly and curb lenders' market power significantly, leading to large gains in consumer surplus, whereas higher compliance costs unambiguously decrease consumer surplus.
Keywords: credit cards; regulatory interventions; consumer financial markets
JEL Codes: D83; D14; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Interest rate caps (E43) | reduction in credit supply (E51) |
| Interest rate caps (E43) | reduction in lenders' market power (G21) |
| Interest rate caps (E43) | increase in consumer surplus (D11) |
| Interest rate caps (E43) | shift surplus from lenders to borrowers (F65) |
| Higher compliance costs (Q52) | decrease in consumer surplus (D11) |
| Higher compliance costs (Q52) | reduction in fraction of borrowers obtaining credit (G21) |